The strange, underground world of Chinese counterfeit cigarettes.

China's Marlboro Country

The strange, underground world of counterfeit cigarettes.

YUNXIAO, China—On first approach, Yunxiao seems like any other Chinese backwater caught in an uneasy industrial transition. Faded advertisements line the downtown streets, where motorcyclists wearing bamboo-frond hats vie for paying passengers in a riot of honking. A cheerful red banner in the city center exhorts citizens to develop the local economy. The message seems ironic. After all, since the 1990s, Yunxiao has sprouted its own league of millionaires, famous throughout China.

But you won't find their activity downtown.

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Ringed by thickly forested mountains, illicit cigarette factories dot the countryside, carved deeply into caves, high into the hills, and even buried beneath the earth. By one tally, some 200 operations are hidden in Yunxiao, a southwestern Fujian county about twice the area of New York City. Over the last 10 years, production of counterfeit cigarettes has soared in China, jumping eightfold since 1997 to an unprecedented 400 billion cigarettes a year—enough to supply every U.S. smoker with 460 packs a year. Once famed for its bright yellow loquat fruit, Yunxiao is the trade's heartland, the source of half of China's counterfeit production.

Slate V: Hunting Chinese cigarette pirates

Today, China's fake cigarettes—knockoff Marlboros, Newports, and Benson & Hedges—are flooding markets around the globe. They fuel a violent, multibillion-dollar black market and are even more hazardous to smokers than the real thing, yet the industry is little-known.

"Most factories are underground," a Yunxiao cigarette broker confided in hushed tones. "They're under buildings, unimaginably well-hidden, with secret doors from the basements." Even the village temple—topped with an arched red roof and twisting, frescoed spires—conceals a factory below, she said.

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Cigarette counterfeiting is immensely lucrative, with profits easily rivaling those of the narcotics trade. While a pack of fake Marlboros costs 20 cents to make in China, it can fetch up to 20 times that amount in the United States. And though a drug trafficker might land a life sentence if caught, a cigarette counterfeiter usually receives a comparative slap on the wrist—a handful of years in jail or possibly a fine.

"In the last few years, pretty much every market has been targeted," said Andrew Robinson, who directs Philip Morris International's efforts to protect its brand. In 2001, Chinese manufacturers were producing eight different varieties of counterfeit Marlboros. As of last year, though, Chinese counterfeiters were manufacturing separate versions of Marlboro tailored for some 60 countries—down to the specific details of tax stamps and regional health warnings. As many as 99 percent of counterfeit cigarettes in the United States come from China.

When it comes to top-quality fakes like these, all roads lead back to Yunxiao. "Any brand or quality, Yunxiao can help you make it," said a former cigarette smuggler from Fujian. "You just need to name your price."

Villagers wary of strangers act as sentries along Yunxiao's narrow side streets and in its hotels, and outsiders are frequently tailed. Factory raids carried out by Chinese police have yielded semiautomatic rifles and met with machete-armed resistance. Every year, several state and private investigators are murdered in retaliation killings. Though Chinese authorities offer rewards of thousands of dollars for information, few residents dare to take them. "Even if you get the money," one villager said, "you won't have any life left to enjoy it in afterward."

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It's hard to overstate the ubiquity of tobacco in China, home to one of the world's most elaborate and entrenched smoking cultures. Here, the introductory exchange of cigarettes is as ritualized as a handshake, and expensive brands moonlight as everything from wedding gifts to bribes—even offerings on ancestors' tombs.

As an official from the tobacco company Rothmans once put it, "Thinking about Chinese smoking statistics is like trying to think about the limits of space." Every year, China's smokers consume 2.2 trillion cigarettes. The number of counterfeits flooding the domestic market is similarly off the charts. "Each of us has come up with our own strategy to deal with it by now," confided one Beijing smoker who refuses to buy at locations where he doesn't know the owner. On trains, conductors roam the aisles, industriously hawking 75-cent keychain lights that purportedly reveal fake packs.

In China, all legal manufacture and distribution of cigarettes is state-owned and state-controlled. With cigarette sales accounting for nearly 8 percent of China's budget in 2007, the state has a strong motive to keep its supply counterfeit-free. (Officials are zealous about protecting the market, too: Until this April, officials in the central Chinese province of Hubei were required to smoke a collective 230,000 packs of regional brands a year.)

Accordingly, counterfeiters deploy a number of tricks to dodge authorities. One manufacturer built a factory that masqueraded as a military compound, complete with 20 laborers—dressed in castoff army uniforms—who would conduct faux-military drills and sing the national anthem in the yard every morning. Other cigarette-making machines have been hidden on ships, inside concrete bunkers, and even under a lake.

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Back in the 1990s, Chinese counterfeits often came with misspelled health warnings, blurred lettering, and other obvious giveaways. These days, their sophistication sometimes challenges forensic investigators. In the United Kingdom—where authorities report that up to one-third of all cigarettes sold in some areas are fake, mostly from China—customs officers have deployed a trained dog to sniff out counterfeits on the streets.

For the enterprising smuggler, custom-made fakes are only a few clicks away. Manufacturers openly court clients through online storefronts, touting quality guarantees and their equipment's international caliber. One Yunxiao operation, established in 1993, assures customers of its experience exporting to Asia and Africa and says it maintains its own tobacco fields in Laos. The company—which churns out 80 million cigarettes a week—promises a six-day turnaround, door-to-door delivery for certain overseas clients, and impeccable customer service.

The tone is reassuring and gently instructive. For hesitant buyers, the owners guarantee that the U.S. market in particular is a "profit business."

"We strive to build and maintain a total honesty management culture," the manufacturers say, "and will appreciate the chance to do business with you."

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But for U.S. consumers, inhaling the knockoff cigarettes may do even more damage than their genuine counterparts. Lab tests show that Chinese counterfeits emit higher levels of dangerous chemicals than brand-name cigarettes: 80 percent more nicotine and 130 percent more carbon monoxide, and they contain impurities that include insect eggs and human feces.

None of that stops counterfeiters, who reap prodigious rewards from the trade. According to manufacturers in Yunxiao, state-of-the-art cigarette-making machines can set a factory back $1.5 million to $3 million. "But everyone knows that the investment can be recouped in just a few months of manufacturing," a Yunxiao cigarette broker told me.

Even area officials speak of the region's counterfeiting prowess with pride. "For a long time now, a lot of Yunxiao's cigarettes have gone to Russia," said one police officer. "The feedback from Russian customers is that they've gotten used to the fake flavor, and now they don't want the real ones anymore."

The broker says Yunxiao might change someday, but the transition could take many years. One of the manufacturers she knows invested $2.5 million to start a legitimate business elsewhere, but recently quit and returned—disappointed because "the profits could never match counterfeit."

Still, she hopes the industry will make a shift: "We locals would like to see Yunxiao start its own legal cigarette factory someday."